Small businesses struggle with Sarbanes-Oxley

IAN KATZ COMMENTARY

June 10, 2007|IAN KATZ COMMENTARY

You almost have to get lost to find Ocean Bio-Chem, a Fort Lauderdale company that makes the Star Brite brand of cleaning products for boats. It's hidden away in the back of an industrial park alongside Florida's Turnpike. Walk into CEO Peter Dornau's cramped ground-floor office, and Jake, his chocolate Labrador, follows you in.

You get the picture. It isn't exactly the IBM corporate campus or Coca-Cola's headquarters.

Nevertheless, Ocean Bio-Chem's shares trade on the Nasdaq, and like all companies listed on major exchanges, it must adhere to the Sarbanes-Oxley Act of 2002, the stiffened financial reporting requirements introduced in the aftermath of the Enron and fraud scandals.

Small businesses are especially concerned about Sarbanes-Oxley Section 404, which requires companies to develop ways to monitor their financial reporting and have those processes tested by an outside auditor. The complaints go to the heart of a larger debate over whether Sarbanes-Oxley, which is intended to protect investors, could end up hurting companies, their employees and shareholders.

Small business owners contend that they shouldn't be subjected to the same rules as giant corporations. Some say the added expenses of complying with Sarbanes-Oxley might eventually force them to delist their stock, which could hurt their ability to obtain financing.

"Every process has to be documented and then audited," Dornau said. "It's very, very burdensome."

Normally we think of publicly traded companies as vast conglomerates with high-salaried executives, legions of accountants and networks of overseas offices. If a business is important enough to be listed on a stock exchange, it must be pretty big, right?

Guess again. Most public companies based in South Florida are tiny by Wall Street standards. Ocean Bio-Chem's sales totaled about $20 million last year. Exxon Mobil brings in that much every 28 minutes.

Sarbanes-Oxley "is a tax on small companies," said Lew Gould, CEO of Boca Raton tool manufacturer Q.E.P. Co., which trades on the Nasdaq. "We can't do the same damage to our shareholders as Enron could. Why does the same rule apply to both of us?" The only winners, he said, are the lawyers and accountants who have great jobs thanks to Sarbanes-Oxley.

Of course, nearly every company complains about Sarbanes-Oxley, just as they oppose many forms of government regulation. But it's logical that the expense of Sarbanes-Oxley is more likely to hurt businesses with thin margins and relatively low revenues than giants that need pages in their Securities and Exchange Commission filings to explain their executive perks.

A report by the federal Government Accountability Office last year found that companies with less than $75 million in market capitalization were spending $1.14 on auditing fees per $100 in revenues, compared with 13 cents per $100 for businesses with a market cap of more than $1 billion.

"I think Sarbanes was an overreaction at the time," said Charles Thayer, a corporate adviser who serves on boards and is chairman of Chartwell Capital, a Fort Lauderdale private investment firm. "That's typcial of legislative response to any problem. There tends to be a pendulum swing. I think the principles of Sarbanes are fine. It's the application that's the problem."

Requirements of Section 404 are being phased in over the next 18 months. U.S. Sens. John Kerry, D-Mass., and Olympia Snowe, R-Maine, on Thursday called for the SEC to give small businesses more time to comply.

The SEC has been reducing some of the reporting burdens of Sarbanes-Oxley, said Greg Orchard, director of internal audit and controls for accounting services firm Jefferson Wells in Fort Lauderdale. "But there is a cost to relying on public financing and selling your shares in the public market," he said. "The idea is to make sure when a company avails itself to the public market there is integrity to the numbers."

To make sure it can comply with Sarbanes-Oxley, Ocean Bio-Chem will double its spending on accounting and auditing next year to as much as $200,000, Dornau said. The company, which has 40 employees at its main office, will likely add two to three more administrative workers, and will have to use an outside consultant and buy new software.

Though they have to be careful not to run afoul of the SEC and investors when talking about the future, both Dornau and Q.E.P.'s Gould wonder how long their companies will put up with the cost of being publicly traded.